Stock-Based Compensation

We measure stock-based compensation expense based on the estimated fair value of equity awards at the grant date, and recognize the expense using a straight-line attribution method over the requisite employee service period. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of restricted stock units, or RSUs. We estimate the fair value of shares to be issued under our employee stock purchase plan using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.

Our condensed consolidated statements of income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:



	Three Months Ended				Six Months Ended
	July 28, 2013		July 29, 2012		July 28, 2013		July 29, 2012
	(In thousands)				(In thousands)
Cost of revenue	$	2,168	$	2,649	$	4,821	$	5,175
Research and development	18,555		18,885		40,490		40,092
Sales, general and administrative	11,672		10,721		20,481		22,557
Total	$	32,395	$	32,255	$	65,792	$	67,824

During the three and six months ended July 28, 2013, we granted approximately 0.5 million and 3.3 million stock options, with an estimated total grant-date fair value of $1.4 million and $10.1 million and a weighted average grant-date fair value of $2.96 and $3.09 per option, respectively. During the three and six months ended July 28, 2013, we granted approximately 0.7 million and 5.6 million RSUs with an estimated total grant-date fair value of $8.9 million and $66.3 million and a weighted average grant-date fair value of $13.49 and $11.93 per RSU, respectively.

During the three and six months ended July 29, 2012, we granted approximately 0.7 million and 3.6 million stock options, with an estimated total grant-date fair value of $3.1 million and $19.3 million and a weighted average grant-date fair value of $4.80 and $5.16 per option, respectively. During the three and six months ended July 29, 2012, we granted approximately 0.7 million and 4.0 million RSUs, with an estimated total grant-date fair value of $8.3 million and $56.5 million and a weighted average grant-date fair value of $12.37 and $14.23 per RSU, respectively.

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that were not expected to vest was $1.8 million and $13.7 million for the three and six months ended July 28, 2013, respectively, and $2.1 million and $13.6 million for the three and six months ended July 29, 2012, respectively. As of July 28, 2013 and July 29, 2012, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $222.8 million and $197.4 million, respectively, adjusted for estimated forfeitures. As of July 28, 2013 and July 29, 2012, we expected to recognize the unearned stock-based compensation expense related to stock options for both periods over an estimated weighted average amortization period of 2.6 years. As of July 28, 2013 and July 29, 2012, we expected to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.8 years and 2.6 years years, respectively.

Valuation Assumptions

We determine the fair value of stock option awards on the date of grant using an option-pricing model that is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, weighted average expected term, risk-free interest rate, expected stock price volatility, dividend yield, actual and projected employee stock option exercise behaviors, vesting schedules and death and disability probabilities. We segregate options into groups of employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. The expected life of employee stock options is a derived output of our valuation model and is impacted by the underlying assumptions of our company. The risk-free interest rate assumption is based upon observed interest rates on Treasury bills appropriate for the term of our employee stock options. Our management has determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of our expected volatility than historical volatility. Dividend yield is based on history and expectation of dividend payouts. Our RSU awards are not eligible for cash dividends prior to vesting; therefore, the fair value of RSUs is discounted by the dividend yield.

Prior to the initial declaration of a quarterly cash dividend on November 8, 2012, the fair value of our equity awards was based on an expected dividend yield of 0% reflecting our prior history in which we had not paid and did not expect to pay cash dividends on our common stock. For awards granted on or subsequent to November 8, 2012, we now use a dividend yield at grant date based on the per share dividends declared during the most recent quarter.

Additionally, for employee stock option and RSU awards, we estimate forfeitures annually and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of accounting standards in future periods, the compensation expense that we record under these accounting standards may differ significantly from what we have recorded in the current period.

The fair value of stock options granted under our equity incentive plans and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended		Six Months Ended
	July 28, 2013	July 29, 2012	July 28, 2013	July 29, 2012
Stock Options	(Using a binomial model)
Expected life (in years)	2.4 - 3.4	3.1 - 4.8	2.4 - 3.4	3.1 - 4.8
Risk-free interest rate	1.8% - 2.7%	1.5% - 1.9%	1.8% - 2.7%	1.5% - 2.3%
Volatility	30% - 33%	43% - 48%	30% - 37%	43% - 48%
Dividend yield	2.1% - 2.2%	—	2.1% - 2.4%	—



	Three Months Ended		Six Months Ended
	July 28, 2013	July 29, 2012	July 28, 2013		July 29, 2012
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	—	—	0.5 - 2.0		0.5 - 2.0
Risk-free interest rate	—	—	0.1% - 0.3%		0.1% - 0.3%
Volatility	—	—	37	%	44	%
Dividend yield	—	—	2.4	%	—

Equity Award Activity

The following summarizes the stock option and RSU activity under our equity incentive plans:



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 27, 2013	32,995		$	14.66
Granted	3,280		$	12.90
Exercised	(1,176	)	$	9.57
Cancelled	(2,408	)	$	19.89
Balances, July 28, 2013	32,691		$	14.28



	RSUs Outstanding		Weighted Average Grant-Date Fair Value
Restricted Stock Units	(In thousands)		(Per share)
Balances, January 27, 2013	15,159		$	14.46
Granted	5,558		$	11.93
Vested	(3,259	)	$	15.43
Cancelled	(628	)	$	13.89
Balances, July 28, 2013	16,830		$	13.46